Transcript Social Security and Pension Reform in China

Social Security and
Pension Reform in China
By Martin Feldstein
Presented by Ian Easton
For Prof. Wu
March 3, 2008
Abstract
 China had legislated mixed social security
pension system
 System has defined benefit pay-as-you-go
and investment-based defined contribution
portion
 Paper seeks to analyze economics of two
systems in Chinese context while
calculating advantage of investment-based
portion
1. Introduction
 Reform of existing unfunded pension system
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critical
Enterprise reform
Sound public finance
Retirees well-being
China already beginning to develop investmentbased system of individual accounts for urban
workers, especially those in State-OwnedEnterprises (SOEs)
Yet important decisions ahead
2. Principles of Social Security
Pension Design
 Pros and cons of PayGo versus funded,
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investment-based systems
Funded better long term, lowers costs and taxes
PayGo tempting short-term, but problem as
demographics change over time
World-wide trend towards funded system away
from PayGo
General academic discussion of possibilities
3. Potential Chinese Gain from
Investment-Based System
 Estimates 7% growth in real wages and
12% return on capital for coming decades
in China
 Makes funded system much more
attractive than PayGo
 Transition fears are wrong, with great longterm gains expected
4. Current Pension System in
China
 Since 1995 most cities and provinces have adopted 2
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part plan for workers in SOEs
One: Employees who work 40 years get 25% of regional
average wage
Funded by payroll tax equal to 9% if 3:1 worker-retiree
ratio
Two: Employees and enterprises contribute 10% of
wages to individual accounts managed by authorities
(majority of money to buy bonds with minority in bank
savings accounts) sometimes channeled into local
projects as bonds and banks can see negative growth
Estimated to be equal to 35% of final year earnings
4. Continued
 Broadening allowable set of investment
options could increase returns w/ big
benefits
 Credible promise of pension could impact
savings rates, lowering them considerably
 Unfunded PayGo would lower household
saving rates more rapidly, but would have
no pension savings with which to replace it
Critique
 Author overlooks or is unaware of tremendous
backwardness of PRC system
 Corruption dangers (i.e. Shanghai pension schemes)
 Massive challenges ahead for China’s investment
environment (i.e. Stock Market)
 Assumes capitalistic system, reality is very much
otherwise
 China still a Leninist, communist country and will likely
stay so for the foreseeable future
 Gov’t economic intervention, no private property,
Terrible legal environment, lack of transparency
Facts (CNN Special Report)
 PRC saves roughly 50% of GDP
 In 2007 China exports valued at 1.2 trillion USD
 In 2007 China saw 75 billion USD in foreign
investment
 U.S. economic downturn will slow demand in
China
 Chinese domestic demand cannot make up gap
 Citibank representative estimates two decades
needed for China to create true domestic
demand-driven economy
Key Questions for Discussion
 Some SOE employees enjoy benefits, what if
enterprise goes private?
 What about majority of Chinese? Where does
their retirement come from? This paper only
speaks to a small minority of population
 With fewer children, and little gov’t help, will
savings rates stay high in coming years?
 Big Q: Will China stay stable? History suggests it
will not, but strong currency reserves and state
security system suggests it will